Regulatory scrutiny and concerns about capital efficiency will likely be the key considerations for Westpac Banking Corp. in its review of its business in New Zealand that may result in the operations being hived off into a separate unit.
The Australian bank on March 24 announced a possible demerger of the business, citing changing capital requirements in the country and the Reserve Bank of New Zealand's requirement to structurally separate it from its Australian operations. The review came after the central bank flagged concerns over Westpac New Zealand Ltd.'s risk governance processes and asked it to commission two independent reports to address the issue.
"If the bank is going to exit, I think the best-case scenario for Westpac shareholders would be selling to a rival. A large rival can afford to pay a premium on the premise they can extract cost savings," Nathan Zaia, equity analyst at Morningstar, said in an email. "Simply spinning the business out to existing shareholders is unlikely to be value accretive, in my view."
Westpac said it is in the "very early stage of this assessment and no decisions have been made."
Currently, the top four banks in New Zealand — Bank of New Zealand, ASB Bank Ltd., Westpac New Zealand and ANZ Bank New Zealand Ltd. — account for more than 80% of the market. A sale could be difficult as regulators are unlikely to let one of the other major players lift their market share by 20% should they acquire Westpac's New Zealand business, Zaia said.
Fix, simplify, perform
Westpac has been selling assets as part of its "fix, simplify and perform strategy" but Zaia said the bank may find it harder to sell the New Zealand business. "I think the New Zealand banking business makes much more sense to keep than the likes of wealth management and lenders mortgage insurance, so I don't think this decision is as clear cut," he said.
Westpac New Zealand contributed A$612 million of cash earnings in the fiscal year ended Sept. 30, 2020, or more than 23% of the group's total cash earnings of A$2.61 billion. In New Zealand, the lender serves about 1.3 million customers and has a 19% share in the consumer lending market and an 18% share in deposits, the bank said.
The Australian bank previously disclosed that Westpac New Zealand would require an additional NZ$1.6 billion to NZ$2.2 billion of Tier 1 capital to meet the RBNZ's new capital requirements that are set to take full effect in 2028. The RBNZ initially proposed the requirements to be effective in 2021 but later delayed the implementation due to the impacts of the COVID-19 pandemic.
"As the RBNZ takes away synergies of owning the New Zealand bank, it's not surprising Westpac is questioning its long-term commitment," Zaia said. "I think the bank will be assessing whether its capital in New Zealand could be better put to use elsewhere."
Further, the RBNZ's requirement for Westpac to commission two independent reports on its risk governance and liquidity risk management systems limits the bank's cost-out potential, JP Morgan analysts said in a March 24 note. "We remain concerned that regulatory pressures and investment in systems will impede its cost-out opportunity relative to the other major banks," the analysts said.
As of March 24, US$1 was equivalent to NZ$1.43.
